Tuesday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions

Canadian National Railway Co. (CNR-T, CNI-N) enjoyed "yet another quarter of best-in-class results," said BMO Nesbitt Burns analyst Fadi Chamoun.

On Monday, CN reported second-quarter adjusted earnings per share of $1.11, a drop of 3 per cent year over year but ahead of both Mr. Chamoun's projection and the consensus estimate. He cited lower-than-expected operating costs as the primary driver of the beat.

"More specifically, lower labour and purchased services expenses accounted for 80 per cent of the variance underpinning an industry-leading operating ratio of 54.5 per cent, a 1.9 [basis] points improvement year over year (versus BMO estimate of 1.2-points deterioration)," the analyst said. "While a larger-than-expected pension benefit coupled with a $10-million one-time depreciation gain helped Q2 results, the underlying operating performance was nonetheless strong."

Mr. Chamoun said CN continues to deal with the recent downturn in freight volumes "with the finesse expected from a best-in-class railroad."

Despite an 11-per-cent decline in revenue ton miles (RTMs), he noted improvements in labour productivity (1.1 per cent year over year and 1.9 per cent year to date), fuel efficiency (2.2 per cent for both), train velocity (5 per cent and 7.8 per cent) and locomotive utilization (3 per cent and 4.2 per cent).

"There is little argument that the company is executing extremely well," he said. "We believe this momentum will carry through into the second half of 2016, which when combined with continued pension tailwind of roughly $40-million per quarter into H2; improving volumes versus H1, and higher Canadian grain pricing, suggest that the company is on strong footing to deliver its guidance for flat EPS year over year. Our estimate is slightly higher at $4.49 (1 per cent year-over-year growth) versus $4.44 previously largely reflecting the Q2 variance relative to our forecast."

Mr. Chamoun increased his price target for the stock to $90 from $85. The analyst average price target is $84.37, according to Bloomberg.

He kept his "outperform" rating.

"We expect volume growth to return to an approximate GDP-like rate or slightly higher from 2017 and we believe that CN Rail can convert that type of growth into high single-digit or very low double-digit EPS growth while converting 80% of net income into free cash flow and generating a leading ROIC [return on invested capital] in the 15-16-per-cent range," said Mr. Chamoun.

Elsewhere, Raymond James analyst Steven Hansen upgraded his rating for CN stock to "outperform" from "market perform" and raised his target to $92 from $82.

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The "overhang" of low interest rates challenging Canadian lifecos deteriorated in the second quarter, said Canaccord Genuity analyst Gabriel Dechaine.

"The Q2/16 macro environment was mixed for the lifecos. U.S. and Canadian long bond yields fell by 20-30 basis points," said Mr. Dechaine in a research note previewing the sector's earnings season, which starts of Aug. 3. "Equity markets were up in North America (S&P up 2 per cent, S&P TSX up 4 per cent), but fell globally (Japan TOPIX was down 8 per cent, EAFE down 3 per cent). We expect this quarter's mix of macro factors to have a negative impact on sector profitability and on capital ratios.

"A 1.70-per-cent Canadian 30-year bond yield is particularly noteworthy as this tenor has historically represented the benchmark yield for long-term re-investment rates of the Canadian lifecos. The industry obtained a reprieve in 2014 when the Actuarial Standards Board (ASB) allowed companies to increase their Ultimate Re-investment Rate (URR) assumption to [about] 4 per cent from 3 per cent (a higher rate is less conservative and requires lower reserves). We note that the ASB also allowed the inclusion of a spread above risk-free rates in this increase. However, with the Canadian 30-year bond yield 60 bps below the year-end 2014 level, we believe the risk that the ASB may need to re-visit (i.e. lower) the prescribed URR assumption has increased."

Though he noted it is still too soon to evaluate the full impact of the Brexit vote, Mr. Dechaine said it is not premature to quantify the forex implications on the earnings of Great-West Lifeco Inc. (GWO-T). After reducing his quarterly earnings per share projection by 2 cents to 70 cents, he downgraded his rating for the stock to "sell" from "hold."

"Aside from this issue, we believe a sell rating is appropriate to reflect: (1) GWO's weak organic earnings growth across most segments; (2) consistently disappointing Putnam performance; and (3) the stock's 20-per-cent forward premium to its lifeco peers and 9 per cent to the Big-6 Canadian banks," the analyst said. "GWO's balance sheet is its main strength, one that is arguably well reflected in its valuation."

He also lowered his target price for the stock by a loonie to $33. The analyst consensus price target is $36, according to Thomson Reuters.

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RBC Dominion Securities analyst Fraser Phillips expects shares of Cameco Corp. (CCO-T, CCJ-N) to be "range-bound" in the near-term as the global uranium market sits in a "state of significant oversupply," remaining in surplus through 2021.

However, in a research note previewing the second-quarter earnings for Cameco, Mr. Phillips projects the company's earnings to increase year over year, citing improved results from its NUKEM Energy GmbH subsidiary, the positive effect of an increase in the loonie and lower corporate costs.

Ahead of the July 28 release of the Saskatoon-based uranium producer's quarterly results, Mr. Phillips said he forecasts earnings per share of 10 cents for the quarter, compared to a 14-cents during the same period in 2015 as well as a 7-cent loss in the previous quarter. The consensus projection is 12 cents.

Mr. Phillips expects uranium sales for the quarter to be flat, noting guidance for 2016 deliveries "heavily weighted" toward the second-half of the year. He also forecasts uranium purchase costs to decline based on lower uranium prices and a higher Canadian dollar.

"Our analysis indicates that at spot prices, Cameco can fund its spending plans through 2018 out of operating cash flow and cash on hand, assuming it makes maximum use of letters of credit for CRA payments," he said.

Revising his estimates for the company, Mr. Phillips's net asset value per share projection increased to $25.75 from $24.81, while his 2016 EPS projection decline to 69 cents from 79.

Accordingly, he dropped his price target for the stock to $17 from $20. The analyst consensus price target is $18.80.

He maintained a "outperform" rating for the stock.

"We believe Japanese reactor restarts could result in a recovery in uranium prices to $30/lb in 2016, but the price is likely to be capped at that level until the market begins to tighten," he said. "We expect Cameco's shares to be rangebound between $10 and $21 as a result. Longer-term, we see significant upside potential for the shares based on our longer-term view that uranium prices must rise to encourage new supply. Cameco is well positioned to take advantage of increasing demand and prices."

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BMO Nesbitt Burns analyst Peter Sklar raised his second-quarter estimates for Magna International Inc. (MGA-N, MG-T) to reflect "positive" production revenue mix.

Following a review of the June North American industry production data from Ward's Automotive, Mr. Sklar raised his earnings per share estimate for the quarter to $1.35 (U.S.) from $1.30.

"Based on June production data, we have calculated the revenue mix for the company's top 20 North American platforms, which accounted for almost 70 per cent of the company's North American production revenue in Q1/16," he said. "In Q2/16, Magna's revenues from its top 20 North American platforms increased 5 per cent year over year, above Detroit Three production (flat y/y), which is a significant measure, as Detroit Three production is the basis for our earnings estimate."

Maintaining his "market perform" rating for the stock, he raised his target price to $39 (U.S.) from $36. Consensus is $50.70.

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Following the closing of its $146-million bought deal, Canaccord Genuity analyst Jenny Ma raised her target price for NorthWest Healthcare Properties REIT (NWH.UN-T).

On Monday, the NWH completed an offering of equity and convertible debentures, with the proceeds slated to be put toward its international expansion efforts, including the $145-million acquisition of two Brazilian hospitals and a 19.9-per-cent interest in Generation Healthcare REIT, which owns 17 Australian properties.

"WH is the only Canadian-listed vehicle for investing in Canadian and global healthcare infrastructure assets," said Ms. Ma, who re-assumed coverage of the stock from colleague Mark Rothschild. "Through its investment in the Vital Trust rights offering, the acquisition of the GHC management platform, and the pending acquisition of a 19.9-per-centstake in GHC, NWH has increased the diversification of its portfolio and bolstered its positioning in the Australia/ New Zealand healthcare real estate market. Furthermore, the REIT's acquisition of two assets in Brazil and leasing to a proven and strong operator in Rede further enhances its portfolio, in our view. Notwithstanding the REIT's slightly higher leverage (including convertible debentures as debt) of [approximately] 60 per cent on a proportionate basis (compared to the Canadian REIT average of 50 per cent) and AFFO [adjusted funds from operations] payout ratio above 100 per cent (which we expect to improve over the near term as cash flow grows), we believe NWH is well-positioned to benefit from long-term positive trends in healthcare that should drive demand for related real estate."

She added: "Pro forma the recently announced transactions, the REIT's exposure to Canada is 45 per cent (by net operating income), down from 50 per cent at Q1/16 and 100 per cent prior to the merger with NWI [NorthWest International Healthcare Properties Real Estate Investment Trust]. Brazil now accounts for 26 per cent of pro forma NOI, followed by Australia/ New Zealand at 23 per cent, and Germany at 6 per cent. By asset class, the REIT will generate 55 per cent of pro forma NOI from MOBs [medical office buildings], down from 61 per cent at Q1/16, and 100 per cent prior to the NWI acquisition. On a pro forma basis, hospitals account for 45 per cent of NOI."

Ms. Ma kept a "hold" rating for the stock while raising her target to $10 from $9.50. Consensus is $9.91.

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Following Monday's announcement that Verizon Communications Inc. (VZ-N) is set to buy Yahoo! Inc.'s (YHOO-Q) core Internet properties for $4.83-billion (U.S.) in cash, Morgan Stanley's Brian Nowak and Macquarie's Benjamin Schachter downgraded their ratings for Yahoo!.

Mr. Nowak moved the stock to "equal-weight" from "over-weight" and lowered his target to $42 from $46. The analyst average is currently $42.25.

Mr. Schachter's rating fell to "neutral" from "outperform," while his target rose to $39 from $36.

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In other analyst actions:

FirstEnergy Capital analyst Michael Dunn upgraded Encana Corp. (ECA-T, ECA-N) to "market perform" from "underperform" and raised his target price to $8 from $7.40. The average is $9.45.

GMP analyst Jimmy Shan initiated coverage of Slate Office REIT (SOT.UN-T) with a "buy" rating and target of $8.50. The average is $8.22.

FBR Capital Markets analyst Barton Crockett downgraded Walt Disney Co. (DIS-N) to "market perform" from "outperform" with a target of $108 (U.S.), down from $111. The consensus average is $109.96.

Mr. Crockett also downgraded Time Warner Inc. (TWX-N) to "market perform" from "outperform" with a target of $81 (unchanged). The average is $86.03.